Falling short of expectations

Friday, December 21, 2012

U.S. government’s FCPA guidance deemed helpful, but far from perfect in terms of clarifying the punitive law.

By Eric Johnson

On Nov. 23, the global retailing giant Walmart suspended a number of India-based executives as part of an internal probe into bribery allegations there.
Why was the date significant? Because it came just a week after the U.S. Justice Department and Securities and Exchange Commission jointly released a 130-page guidance on the Foreign Corrupt Practices Act (FCPA).
The long-awaited guidance is designed to be a sort of desktop reference for businesses on how to handle the realities and hypotheticals of the 1977 Act, which bans U.S. companies from bribing foreign officials to gain preferential business treatment.
FCPA remained largely dormant for more than two decades before the Justice Department began pursuing violations of the Act with more vigor in the last decade. Roughly $4 billion in penalties have been doled out between 2008 and 2011, including $1.8 billion in 2010 alone. Ten individuals have received prison sentences of three years or longer.

Shipper takeaways

Guidance should be useful to help shape best practices in foreign bribery compliance.

In recent years, FCPA has ensnared several prominent U.S. companies, but has been criticized among business advocates for being opaque and overly punitive.
Walmart’s moves in India came amid a global inquiry it is making into bribery claims at its Mexico, Brazil, and China operations. The timing of the suspensions might well have been a coincidence, but the guidance has refocused the attention of companies doing business globally on FCPA.
While the guidance was welcomed by the trade community, it hasn’t exactly solved all the problems companies face in terms of determining what precisely constitutes a violation of FCPA rules.
“It’s welcome but not earth-shattering,” Ashley Craig, a partner with Venable whose practice covers both trade and transportation issues as well as foreign corruption, told American Shipper. “It’s nothing truly revolutionary. But there is recognition that the commentary and examples DOJ and SEC highlight have been well-received.”
Nearly every major law firm, trade-related or otherwise, put out an advisory on the guidance when it was released Nov. 15, and the consensus was nearly unanimous — helpful, but not perfect. Companies that operate in foreign countries wanted a document that codified prohibited activity, not merely suggested certain types of activity that constitute violations, according to Lisa Rickard, head of the U.S. Chamber of Commerce’s Institute for Legal Reform.
The problem is that while the guidance does give practical examples of the types of actions deemed to be violations under FCPA, it still leaves large gray areas.
Craig’s colleague at Venable, Jan Handzlik, a partner in the firm’s Securities Enforcement & White-Collar Defense practice group, called the guidance “underwhelming.”
“Instead of responding to widespread concerns about the Act’s lack of clarity, the guidance for the most part simply reiterates positions taken by the DOJ and SEC in past enforcement actions,” he told the Website FCPAblog.com. “DOJ now cites as settled law its own interpretations of the FCPA and the ‘principles’ it has developed over the years through deferred prosecution agreements and similar enforcement actions.”
Here’s what the guidance does do well, Craig said:

It clarifies that some appropriate level of payment for government facilitation is allowed.

It also more clearly defines what constitutes a foreign official.

In terms of gifts and entertainment, the guidance provides some clear examples that can allow a company to broadly understand what is considered to rise to the level of a violation.

The subject of gifts and what constitutes a violation remain murky, however.
“While stating that ‘small payments or gifts’ will lead to an enforcement action ‘only when they comprise part of a systemic or long-standing course of conduct that evidences a scheme to corruptly pay foreign officials to obtain or retain business,’ the guidance leaves unresolved the substantial gray area between these items of nominal value and the sports cars, fur coats, and $12,000 birthday trips listed as examples of improper hospitality,” said the white collar investigations and enforcement practice of the law firm Bingham.
There is, of course, a broad applicability of the law to the shipping and logistics world. First of all, companies engaged in importing and exporting naturally conduct business of some sort in foreign nations. But drilling down further, there are direct applications when it comes to how companies deal with, say foreign customs officials, or state-owned shipping or logistics entities.
“That’s a red flag in the shipping business,” Craig said. “We always hear, ‘it’s the way you do business in China. You take guys at China Customs out for dinner.’ But that has always been something that in my mind could be interpreted to rise to the level of a FCPA violation.”

“We always hear, ‘it’s the way you do business in China. You take guys at China Customs out for dinner.’ But that has always been something that in my mind could be interpreted to rise to the level of a FCPA violation.”

— Ashley Craig, partner, Venable

The law could also theoretically apply to agents of U.S. companies where the bribery does not even involve the U.S. entity.
In places where Walmart is investigating bribery allegations, bribes to government officials are not only widespread, but sometimes endemic. An expectation of such activities disadvantages American companies that must comply with FCPA against, for example, domestic companies that don’t.
FCPA can be applied to any company with any tie to the United States. An example could be a company that might not have any direct dealings in the United States, but whose representative makes an incriminating phone call or email while transiting a U.S. airport. Ties to U.S. financial institutions are another way FCPA could apply to foreign companies suspected of bribery.
Meanwhile, an expanding array of unilateral bribery acts is threatening to make things even more difficult for multinational companies. Though the Paris-based Organization for Economic Cooperation and Development (OECD) has sought to develop global bribery standards through its Anti-Bribery Convention, most nations that have enacted bribery laws have taken that blueprint and tweaked it.
In the case of the United Kingdom, which last year released a revamped bribery act, it goes beyond tweaking. The U.K. Bribery Act (UKBA) is considered to be the most all-encompassing anti-bribery legislation globally.
Craig explained a key difference between UKBA and FCPA is that Britain’s law allows for absolutely no facilitation payments.
“Overlap is way to phrase how the two laws intersect,” he said. “FCPA has been around for quite some time. The Brits spent the last many years revising their Act and the U.K. Bribery Act is really the most recent effort on a global basis for a government to update their anti-bribery statute.
“The main difference between the U.S. statute and the UKBA is that the UKBA applies to all acts of bribery. The government doesn’t have to be involved,” Craig said.
In the United States, he said, there can be a gray area for non-governmental corruption allegations between federal, state, and local jurisdictions.
“The UKBA has a more far-reaching application,” he said. “How it’s administered remains to be seen.”
The web of anti-bribery legislation globally was laid out in Venable’s Mid-Year 2012 FCPA Snapshot report.
“July 2012 marks the one-year anniversary of the U.K. Bribery Act’s taking effect. China, India, Canada, Russia, and Greece revamped their anti-corruption efforts in 2011 and early 2012,” the report said. “This added another layer of complexity to anti-corruption compliance for multinational corporations.”
One other thing the guidance clarifies: companies that investigate internal allegations and show efforts to improve compliance are looked upon more leniently, according to the Harvard Law School Forum on Corporate Governance and Financial Regulation.
“The guide makes clear the government’s commitment to providing favorable treatment to organizations that self-report, cooperate and remediate when FCPA issues arise,” the forum said. “The guide credits voluntary and timely disclosure of violations, recognition of the seriousness of misconduct and efforts to improve an existing compliance program and discipline wrongdoers. To illustrate this approach, the guide lists six examples of recently declined enforcement actions. In all six, the targeted company voluntarily disclosed a violation, disciplined the responsible employees and undertook a review of its compliance procedures.”
As for future guidance or clarification, considering the wait it took for the trade community to get the Justice Department and SEC to release the current guidance, no one should hold their breath for a revision.
“It’s what we’ve got for now,” Craig said. “It took a long time to get to this point. I think you’ll see everyone let the dust settle, and companies will try to extract best practices and apply them to their business. I don’t, however, see a 2.0 version coming in the next 12 months. It will take longer than that. I think the DOJ will look to update this more often, but certainly not on an annual basis.”